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The election of Donald Trump as the next U.S. president has been a game-changer thus far for fixed-income markets, upending all expectations of what will happen next. One thing is for sure, though: Trump’s policies will have a major, far-reaching impact once more details are known.

President-elect Trump has two main areas of focus where he promised to make broad changes during the presidential campaign. First, he promised to pass more fiscal stimulus, including tax cuts, infrastructure spending and the repatriation of overseas corporate cash. These are pro-growth policies, but they will likely spur inflation in the long term. In anticipation of this outcome, inflation expectation gauges such as the Five-Year, Five-Year Forward Inflation Expectation Rate (which measures inflation over the five-year period that begins five years from today) have moved sharply upward; interest rates have followed suit, with the 10-year Treasury yield rising about 60 basis points thus far since the election.

In many ways, this is looking like the fourth bond market “tantrum” in the last several years, the first of which occurred in 2010 when the second round of quantitative easing (or “QE2”) was announced. This was followed by the “taper tantrum” of 2013 when bond yields soared after then-Fed Chair Ben Bernanke hinted at tapering asset purchases, and then by the European Central Bank’s implementation of quantitative easing in 2015. When pro-growth policies are implemented, higher inflation is typically the result. But will the Trump administration be able to push forward with these plans?

Although the Republican Party is in control of the White House, Senate and House of Representatives, the party itself is divided and being able to reconcile their differences and push through Trump’s ambitious fiscal initiatives is not a foregone conclusion. For example, the Tea Party faction eschews government spending, and thus may have a hard time giving the green light to new plans to raise a massive amount of debt to bolster infrastructure. President-elect Trump will definitely need to use the deal-making skills he’s touted in the past to help these pro-growth strategies pass muster within his own party.

The second focus of Trump’s campaign priorities is his desire for de-globalization and limits on immigration. For example, he has said he would impose tariffs on imports from China and Mexico and crack down on illegal immigration to the U.S. Implementing these ideas would result in higher prices for American consumers as a result of a reduction in global trade, as well as higher costs of labor for American businesses stemming from a smaller supply of workers. These priorities are expected to temper economic growth while at the same time causing inflation to rise.

The best case scenario would be that Trump’s tax reduction policies would stir up “animal spirits” and encourage an increase in corporate investments. This would in turn inspire confidence in the economy, which is positive for risk assets in general. Other policies would help put money into building more factories in the U.S., as outsourcing would decline in favor of onshoring. Under this scenario, we would anticipate U.S. gross domestic product (GDP) growth of between 3% and 4%.

There is a big risk, though, that the policies will be watered down as they are put through Congress. If so, we wouldn’t expect as much growth but inflation expectations will have already been pushed upward. If this was the case, we may end up with a stagflation environment, where meager growth isn’t enough to offset inflation. Another facet to this situation would be where the U.S. Federal Reserve (Fed) would be forced to act to fight inflation if it significantly exceeded the Fed’s target of 2%. If the Fed tightens monetary policy more quickly than anticipated, it could bring about a worst-case stagflation scenario.

Because of the current low-rate environment, corporate borrowing is high. If interest rates rise rapidly, debt servicing costs will skyrocket, and corporate credit profiles will deteriorate.

Regarding the credit cycle, the Trump victory has actually reduced the risk of recession, and could be positive for the economy if pro-growth policies take root. Corporate fundamentals have a chance of improving under these circumstances, and the credit cycle could be extended by another few years.

For now, we have a positive outlook on U.S. credit. The downside risk has been mitigated by the growth-focused agenda of the Trump administration. However, we will need to revisit our outlook by mid-2017 to see if solid growth has taken hold or if growth remains slow but with inflation heading higher. If the latter occurs, this could mean that the credit cycle could quickly turn negative.

In our view, it is unlikely that inflation will rise above 2.5% in the next six months. Additionally, we should continue to experience diverging interest-rate cycles between the Fed and other central banks in the developed markets, such as the European Central Bank and the Bank of Japan. If anything, the trend will probably become more pronounced over time. Right now, European economic growth continues to be below 1%. Because of extremely low growth and accommodative monetary policies elsewhere in the developed world, the U.S. is likely to continue to attract more capital with its relatively higher interest rates and stronger growth prospects. European and Japanese investors will want to invest in them, and U.S. fixed income with longer maturities will draw pensions and insurance funds as well.

For now, U.S. fixed income is in a good place, but whether or not this will continue to be the case depends on Trump and his ability to execute on his campaign promises.

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Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

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